How often do you wonder where all your money went? Are you living paycheck to paycheck but don’t understand why? Here are the top reasons so many people find themselves in this predicament:
1) You don’t know WHY you have a budget
Some people think the only goal of budgeting is to know where your money’s going. However, does that really matter if your spending behavior doesn’t follow the budget plan? The true goal of budgeting is to make sure you’re spending less than you make. I’ve found that once you categorize your expenses into needs, wants and debts, it’s an eye opener to where the spending issues exist. With a formal budget in place you should go through it every month and compare real spending against budgeted spending. This then sets you up to make sure you’re able to achieve big life goals such as buying a home, going on a dream vacation or planning for a stress free retirement.
2) You’re being unrealistic
Before you formalize a budget you should gather your previous 12 months’ spending activity using your checking account and credit card statements. Then you need to add up your spending by expense categories such as mortgage/rent, utilities, groceries, insurance, entertainment, etc… This exercise can take a while but is critical to understanding what you’re spending on WANTS such as clothing and entertainment. All the little/non-fixed expenses can add up to A LOT OF MONEY! After you do this exercise you can then proceed with a realistic budget which includes cutting back on frivolous spending.
3) You’re not using CASH for WANTS
This goes hand in hand with #2. It may sound old-fashioned but if you’re being realistic you should always use cash for non recurring expense items such as entertainment, restaurants and yes, even groceries! Groceries are considered a NEED to a certain extent. However, you’d be surprised how much money is wasted at the grocery store especially if you go to one that also sells general items. Only bring the cash you allotted for food and add up your grocery cart items along the way. This will prevent you from adding unnecessary items to your cart.
All fixed and necessary bills such as car payment, mortgage/rent, utilities, insurance, debt can be paid via bill pay or checks and budgeted first. The expense categories that fall under WANTS are the ones we tend to overspend on and should be paid for with CASH. When you’re using debit cards or credit cards you end up spending more than you budgeted and therefore, more than you can afford. This usually happens before you even realize it. When you’re out of cash, you’re out of cash! When you’re getting low on cash you’ll make sure you have enough for groceries until the next paycheck which then means you’ll have to say NO to going out to eat or movies with friends.
4) Your spouse or significant other is not on board with a budget
Your significant other should understand your budget EVEN if you don’t share bank accounts. They need to know you have a plan for your money and therefore can’t go on a spontaneous weekend getaway or a shopping spree. The expectation has to be there ahead of time so they won’t ask you to do silly things with your money.
If it’s a spouse, they need to be fully on board with the budget. You both need to decide how you’ll spend the extra money after covering the necessities (needs and debts). If your spouse or significant other is not on board, there will be too many surprises along the way and you will spend more than you can afford or miss saving on your dream items such as a new house or a kitchen remodel.
Overall, budgets are necessary if you want to make sure the money you’re working hard for is used properly. You’d be surprised how much you can do if you have a plan for your money.